Tag Archives: Star Scientific

What would real reform in Virginia look like?

A couple of months ago, I blogged about Virginia Governor Bob McDonnell and the gifts he and his family have received from businessman Jonnie Williams, Jr. The comments were eventually picked up by journalist Katie Watson, first in a column and then in an interview with the local CBS affiliate. Eventually the Richmond Times Dispatch invited me to turn the blog into an OpEd and this last Sunday Bart Hinkle of the Dispatch elaborated on the point in an excellent post. I suspect many readers will agree that Hinkle made the point far more eloquently than I:

Many have wondered why McDonnell, otherwise a paragon of rectitude, would take such swag. But nobody has asked why Williams would give it — because the answer is obvious. Star Scientific has not made a profit in a decade. But it might, if the governor were to place the weight of the state on the economic scales.…Virginia’s governor has a lot of quo to give whether or not he takes a fistful of quid.

Image by hin255

Image by hin255

 

In my view, Virginians need to think as constructively as possible about the sorts of reforms that would prevent scandals like this from happening in the future. Unfortunately, my guess is that the political response will focus—to use Hinkle’s words—on the quid and not on the quo. I believe this would be a huge missed opportunity.

In Virginia, gifts to public officials valued at $50 or more are permitted but must be disclosed, while gifts of any value to family members of public officials are permitted and do not need to be disclosed at all. Just about every article I’ve read on the matter emphasizes this point and I’d guess that a number of legislators are busy drawing up bills to change these laws as I type. For his part, the governor himself has indicated an interest in changing the ethics laws, though he’s offered no specifics.

It’s understandable that this is peoples’ first instinct: If business owners are giving money to elected officials and their family members in return for special treatment from government, it seems only natural that there ought to be a law forbidding such gifts to elected officials and their families. I’m not opposed to such laws per se. But it would be a mistake to think that they are going to solve the problem.

Water flows downhill. And as long as elected officials are expected to dole out lucrative privileges to particular firms, particular firms will want to play in the political sandbox.

Even if Virginia adopted a complete ban on all gifts of any size to elected officials and their family members, I predict firms and their leaders would still donate to political action committees, they’d endorse candidates, they’d sponsor third-party political advertisements, they’d organize get-out-the-vote efforts, and they’d host fundraisers and campaign events. In an endless game of whack-a-mole, reformers could no doubt try to curtail these efforts too (with the First Amendment a likely casualty). But so long as businesses face such lucrative incentives to play politics, the reformers will always be one step behind.

A better—more permanent, and more direct—reform would strike at the heart of the quid-pro-quo problem. It would limit the government’s ability to favor particular firms in the first place. This would require the elimination of all targeted tax exemptions and credits. The state could then use the extra money obtained from closing loopholes to lower its corporate and individual tax rates. The state would also need to eliminate all programs that make grants or loans to particular firms (you can see a listing of such programs here).

In one fell swoop, these types of reforms would instantly remove the incentive for firms to seek the favor of politicians. These reforms would also improve the economic climate of Virginia. Without government assistance, industries would be more competitive, lowering their prices and improving the quality of their products. Firms would pay more attention to trends in customer desires rather than political trends. This would help ensure that labor and capital would be allocated on the basis of genuine costs and benefits rather than political costs and benefits. And millions of dollars that are now wasted in seeking government-granted privilege could be put to more valuable uses.

This does not mean that the state would be powerless to entice firms to relocate here. Governors, legislators, and mayors across the state could and should work to make sure that Virginia’s tax and regulatory regimes are the least burdensome in the nation. Elected officials (and their spouses) could and should tout the state’s superior business climate.

And one of their talking points would be the fact that all businesses in Virginia get the same fair shake, whether they donate to politicians or not.

You tell me it’s the institution…

When scandals erupt, the human tendency is to look for some nefarious person wearing a black hat and blame them. However psychologically satisfying this may be, it is not particularly helpful. It offers no constructive solution to avoid future problems, other than to be “ever-vigilant” against bad behavior.

In contrast, law professor Victor Fleischer’s take on the unfolding IRS scandal is a nice example of a more-useful reaction, one that focuses on the institutional factors that made the scandal likely to happen in the first place:

The root of the problem is poor institutional design, not a political conspiracy. Current law forces the I.R.S. to enforce a vague set of campaign finance laws that have next to nothing to do with raising revenue.

It is constructive to apply Fleischer’s approach to another unfolding scandal. In the past few weeks, the press has reported that the FBI is investigating Virginia Governor McDonnell for his ties to a major donor, Jonnie Williams. Williams, described by McDonnell as a close family friend, paid for the food at McDonnell’s daughter’s wedding reception and loaned the first family his fancy sports car for a day. In the last few years, the governor and the first lady seem to have given Williams’s company, Star Scientific, free promotion. For example, in August of 2011, McDonnell appeared at an event promoting Star Scientific at the Executive Mansion. And in June of 2011, the first lady flew to Florida to tout the company’s product, a dietary supplement.

The inquiry apparently began out of concern for the possibility of a quid pro quo: perhaps the governor and the first lady offered this free promotion in exchange for political and personal favors? For their part, the governor and first lady have maintained that it is their job is to promote Virginia businesses.

Indeed, the state legislature seems to think this is part of the governor’s job. Over the years, legislators have given the governor a host of tools to offer exclusive privileges to particular businesses. For example, the Governor’s Opportunity Fund “is a discretionary incentive available to the Governor to secure a business location or expansion project for Virginia.” There’s also the Governor’s Agriculture and Forestry Industries Development Fund. This too gives grants “at the discretion of the Governor.” You can read about these and other programs at the “business incentives” section of the Virginia Economic Partnership website. There, you will see that privileges include subsidies, matching grants, in-kind donations such as training, corporate and individual income tax credits, sales and use tax exemptions, property tax exemptions, and various financing programs. (In the case of Star Scientific, the governor seems not to have availed himself of any of these programs. Instead, he and his wife seem to have simply talked favorably about the company, just as they frequently talk favorably about other Virginia businesses.)

Presumably legislatures give governors the authority to grant special favors to firms because they believe these favors benefit the state. But the evidence that targeted incentives lead to any sort of widespread prosperity is quite scant. And as my research has emphasized, privileges lead to a host of economic problems because they undermine competition, encourage wasteful privilege-seeking, and put politicians rather than consumers in charge of allocating capital and resources.

But the Virginia story illustrates another cost of privilege: it inevitably invites questions of impropriety. The fact is, it is very difficult to devise objective criteria for dispensing privileges to particular firms. So one doesn’t have to look very hard to find apparently subjective decisions: Was Solyndra awarded half a billion taxpayer dollars because it had a superior business model? Or was it given money because green energy is politically popular and the vice president wanted to host a ribbon-cutting ceremony there? Did the Administration offer trade protection to domestic solar panel makers because the Chinese were engaged in “unfair competition” or because domestic solar panel manufacturers are politically powerful and well-connected?

I don’t see how these questions could possibly be answered definitively. Instead of trying to pretend that they can be, we should change the institutions that inevitably give rise to charges of impropriety. We should stop presuming that an elected official’s job description includes the promotion of particular businesses. If we stop asking politicians to pick winners and losers, there will be no more scandals about whom they pick.

Full disclosure: A few years ago, Governor McDonnell appointed me to serve on Virginia’s Joint Advisory Board of Economists. Once a year I travel to Richmond and offer my opinion on the state’s economic and fiscal forecasts. I am not compensated for my participation.